1. Aalborg UniversityBSc Economics and Business Administration 2012 October 24
2. BSc Economics and Business Administration Mini Project The ZARA Case Study in Economics and The Organisation of Economic Activity The report has been prepared by:Inga Dragunaite ___________________________________Justina Vaidziulyte ___________________________________Kristina Kirilova ___________________________________Aleksandar Varbanov ___________________________________Nebojsa Abadzic ____________________________________ Delivery date: 26-10-2012 Number of words of the report: 5425 2
3. ContentsIntroduction ..................................................................................................................................... 4Describe the Value Chain of Inditex ............................................................................................... 5From Agency Theory view, describe the incentives structure for the store managers .................... 9From Transaction Costs Economics view, discuss if it makes sense to outsource work to“captive” suppliers. What would be the alternatives, and how do you evaluate them? ................ 12In relation to the fashion sector in Europe, does Inditex posses a competitive advantage? Use theVRIO framework as the basis of your discussion ......................................................................... 16List of sources ................................................................................................................................ 19 3
4. IntroductionInditex is an eight-brand group of the world’s largest fashion retailers with its headquarterslocated in La Coruna, in Spain. Founder and majority owner of the company is Amancio Ortega,famous Spanish entrepreneur. Chairman and CEO of the company is Pablo Isla Alvarez deTejera. Inditex’s corporate culture is based on close communication between the customers andthe employees. Today company has more than 100.000 employees worldwide.The largest brand of Inditex is Zara, which runs three independent product lines for women, menand children where most of the accent is stressed on women’s garment. Each of the lines ismanaged by separate team which consists of Diression de Tiendas (DTs). DT’s collaborate withcommercials, country managers, HR managers and headquarters. We can freely say that Zara isa pioneer in fast fashion industry. The customer is at the heart of their unique business model,which includes design, production, distribution and sales through their extensive retail network.The Zara case study is an interesting example on how one company can be successful on themarket. The dynamics of the company and its adapting ability show how important is the rightthing regarding market’s needs. Zara is an apparel chain that works differently from traditionalretailers. The main characteristic is the vertically integrated model. Instead of relying fully onoutside partners, the company manages all design, warehousing, distribution, and logistics itself.The products are distributed in small batches. Due to the stylish garment and affordable prices,consumers visit Zara’s stores very often. 4
5. Describe the Value Chain of InditexValue Chain InditexPrimary Value Chain Activities Inbound Logistics Inditex Group is a vertically integrated group, which controls most of its supply chain. About 50 % of its products are manufactured in Spain, 25% comes from Europe, and the remaining fraction is produced in locations in Asia and Africa1. After that, the whole production is received and warehoused in the logistics centers in Spain before being sent to the stores. It does not matter where they have been produced, the main categorization is happening in Spain. Materials and fabrics are kept in warehouses without exact colors or prints, due to be able to react quickly to market changes. If it turns out that the demand is higher for the particular product, the company is able to react quickly and produce additional items with a particular design or color2. Sometimes, transportation of merchandise is by plane; for example: clothes, which are produced in Asia, have to be transported in logistics centres in Spain, there categorized and again transported to the Asia. Furthermore, many countries have small warehouses where they keep extra or returned goods3. Operations Inditex country offices represent headquarters at the country level, supervising and coordinating the operations of the various Inditex brands4. Zaras headquarter in Spain consists of three spacious halls for each of these centers. There designers work together with market specialists and planners for procurement and production. Also, here designers can quickly check initial drafts with their colleagues and discuss about new styles. Therefore, prototypes can be examined on site. That kind of teams can work very efficiently; discuss about new fashion trends and take decisions within a few hours. Market specialists are intermediaries between designers and store managers, who can1 Notes on Zara case2 Notes on Zara case3 Zara: managing stores for fast fashion4 Zara: managing stores for fast fashion 5
6. quickly provide feedback to their colleagues in design and procurement. 5 What differs Zara from competitors is more capital intensive industry. Each brand from Inditex Group has his own autonomy. They can quickly react to market requirements, act in a flexible way by making changes without asking permission of third parties. For example, Zara has power on operations, such as dying, labeling and packaging, all other manufacturing processes are made by Inditex employees. Zara has three product lines: one for children, women and men. All product lines go parallel with each other, but in an operational different way. Procurement, sales, design and marketing operations exist for each of these lines; just they are different and separated. Outbound Logistics At the beginning of each season, the whole merchandise is being distributed to the stores, in the quantities decided by the commercials. However, when the production reaches the stores, managers are responsible for the order replenishments. It is their responsibility to decide how many units of each item to order and to do that, they are taking into consideration various data (forecasts of customer demand, how many of that product the store had and already sold and etc.) European stores are receiving their deliveries within 24 hours; in Asia and America receiving deliveries take 40 hours6. Usually deliveries are done by trucks or planes. Each week, stores are receiving about 12,000 units. However, sometimes it happens that they did not receive the whole order, because inventory at the logistics centers are limited.7 Also, there were some improvements in time saving process. In the beginning when the new merchandise was delivered, employees had to put tags on the products before they could reach store shelves, now tags are put by manufactory workers. This improvement puts some value on faster delivery of the production to the customer.5 Notes on Zara case6 Zara: managing stores for fast fashion7 Zara: managing stores for fast fashion 6
7. Marketing& Sales Zara is using very unique marketing strategy. Due to the fact, that they are not outsourcing their manufacturing, company can quickly respond to the customers demand in fashion trends. Zara’s unique selling proposition is to produce the latest trend products within very short time (few weeks) and at affordable prices. Moreover, products are on the store shelves no longer than one month. People are more or less forced to buy the product, which they like due to the fear that next week it can be sold out. Products, which are not sold out are afterwards discounted. Zara has approximately eighteen percent of unsold merchandise, which is one of the lowest in the industry. Comparing with other similar companies, Zara does not spend much money on promotion. However, it does not mean that the company is doing nothing. Zara thinks that the store windows and the content is the most necessary advertising for them. Last, but not least interesting thing about Zara is that it owns the majority of its stores, but also does joint venturing and franchising in markets which are high risk and culturally distant. Service Zara’s customers are young people, who are usually in a hurry; want to buy quickly something what they like without being bothered. Due to this fact, sales associates are required to help, when they see that customers need help or ask directly for help. Therefore, company is putting more effort in managing products than customers. Also, it is very important to make sure that customers do not wait in long queues. Zara respects customers complain and try to respond as soon as possible.Support Activities Procurement Zara sources fabric, other inputs and finished products from external suppliers who are usually in low cost source markets. After certain designs are chosen for production, material is drawn from stock, cut, manufactured and delivered to company stores around 7
8. the world. Zara also owns 20 other factories for internal manufacturing that apply just in time.8 Inditex is purchasing raw materials through the company’s regional offices in the UK, China, Holland and other offices based in Europe, Asia and Australia.9 Technology Development Company puts the value on information transfer. The whole Zara’s supply chain is connected through the constant flow of information. Zara developed way how to transfer information easier than before. They invested a lot in IT in the 1990’s before major phase of international expansion. They developed quick response systems in the industry. Company is using PDA (Personal Digital Assistance) in stores, which ensures a quick information flow within the company and creates value for the customers.10 Also, this system helps for the company to find out about new market trends as fast as possible and possibility to react